Market Update May 16, 2022

Photo by Yana Gorbunova on Unsplash

Economic data for the week included higher readings for the producer price and consumer price indexes—continuing a trend of higher inflation. However, import prices saw some relief. Continuing jobless claims fell further to very low levels, indicating labor market strength.

Global markets fell back sharply last week, as volatility amidst a variety of geopolitical and financial crosswinds as well as a rising interest rate regime kept sentiment depressed. Bonds reversed course and saw gains as longer-term yields fell back from recent peaks. Commodities were mixed, with little change in oil prices, which remained high.

U.S. stocks were down again, representing the sixth straight down week for the S&P 500. However, Friday’s advance trimmed the negativity from earlier in the week, which seemed to be helped by the Elon Musk purchase of Twitter (and use of Tesla share proceeds) to be on hold. By sector, only defensive consumer staples ended in the positive, followed by minor declines for communications, health care, and utilities, while all other groups were sharply negative. Real estate securities also fell back nearly -4%.

Language from the Fed of the prior week started to cause hopes for a ‘soft landing’ to diminish—that would be the ideal place of controlled inflation but rates not tightened enough to cause a recession. Over the last 13 rising rate instances since 1955, 10 have resulted in recessions, with 3 soft landings (per Schwab data). So, while possible, many economists and investors are hesitant in placing too much hope. Continued lockdowns in China, exacerbating supply and transportation hurdles, kept sentiment depressed as well.

The Federal Reserve’s Financial Stability Report, published semiannually, was released, and offering a mixed to pessimistic view of the economy. Notably, current high inflation, rising interest rates, and lower liquidity have raised risks, notably if economic growth slows. Of course, this is stating the obvious, but does explain the higher amount of asset volatility in recent weeks—as markets digest the probabilities of various outcomes. As of Friday, the S&P 500 remained down over -15% from its 1/3/22 peak, with the Russell 1000 Value Index outperforming by only being down -8% relative to the tech-heavy Russell 1000 Growth down -24%. At these levels, the most common investor question appears to be, ‘Is the bear market over?’ Or, if a recession begins to appear more inevitable, ‘How much lower could we go in the interim?’

Foreign stocks in Europe gained in local currency terms during the week, but were reduced to negative results when accounting for a stronger U.S. dollar. Other regions, including emerging markets especially, were negative in line with U.S. equities and headwinds facing global assets generally—high inflation, tighter U.S. central bank policy and what that means for foreign central banks in the future, Ukraine, and Chinese lockdown impacts. Specifically, Brazilian and Chinese stocks gained, while India and Turkey fell back by the sharpest degree, demonstrating the mixed nature of the week. Covid cases in China appear to be declining, based on reports, but reopenings from severe lockdowns have been slow to unfold. In the meantime, the government has cut interest rates and implemented further stimulus measures to bridge the gap, again.

U.S. bonds reversed course by gaining last week as interest rates fell back across most of the yield curve. High yield and senior loans fell back last week, along with the rally in traditional bonds. Foreign bonds were mixed, despite a strong advance in the value of the U.S. dollar, which usually acts as a significant headwind. In fact, the dollar reached a six-year high against the euro last week.

Commodities were mixed to lower last week, with gain in agriculture offset by declines in energy and metals. The price of crude oil gained under a percent on net to just over $110/barrel, with far less drama than we’ve become used to. Natural gas fell back by nearly -5%. Metals prices remain challenged by lockdowns in China, which has held back manufacturing activity with global impacts. Gold has also fallen as of late, which may surprise some which see it as a ‘safe haven’ during times of market turmoil; however, rising real rates and an exceptionally strong dollar have been more important headwinds. Over the last few days, India’s just-announced ban of wheat exports, in an attempt to tame local food costs, has caused another round of global price gains.

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.